Hansen Medical, Inc. Q3 2008 Earnings Call Transcript

Hansen Medical, Inc. (HNSN)

Q3 2008 Earnings Call Transcript

October 23, 2008, 5:00 pm ET

Executives

Kathy Waller – IR, Financial Relations Board

Fred Moll – CEO

Gary Restani – President and COO

Steve Van Dick – VP, Finance and Administration and CFO

Analysts

Mike Weinstein – JP Morgan

Philip Legendy – Thomas Weisel Partners

Ryan Chu – Morgan Stanley

Ed Shenkan – Needham & Company

Suraj Kalia – SMH Capital

Spencer Nam – Summer Street Research

Richard Sack [ph] – First Allied Securities [ph]

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Hansen Medical Inc. third quarter 2008 results conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions) This conference is being recorded today, Thursday, October 23 of 2008. I would like to turn the conference over to Kathy Waller with Financial Relations Board. Please go ahead.

Kathy Waller

Thank you, good afternoon everyone. Welcome to Hansen Medical’s 2008 third quarter earnings conference call. With us today we have Hansen Medical’s Co-Founder and Chief Executive Officer, Dr. Fred Moll; President and Chief Operating Officer, Gary Restani; and the Company’s Chief Financial Officer, Steve Van Dick.

Before I turn the call over to management, please remember that our prepared remarks and responses to questions may contain forward-looking statements. Words such as “may”, “will”, “should”, “expects”, “believes”, “estimates”, “targets”, “goals”, “could”, “scheduled”, “plans”, opportunity guidance and variations of these words and similar expressions are intended to identify forward-looking statements that are subject to a number of risks and uncertainties.

Examples of such statements include statements about our expected operational and financial results, the expected numbers, locations, and timing of placements of our Sensei Systems and recognition of revenue on systems, the timing and results of our future clinical studies, the receipt and timing of future regulatory approvals, our expected manufacturing capabilities and results, and the timing of future product introductions.

Actual results may differ materially from those set forth in these statements due to the risks and uncertainties inherent in our business, including potential safety and regulatory issues that could slow or suspend sales, our ability to effectively sell, service, and support our products, the rate of adoption of our systems, the rate of use of our catheters at customers that have purchased our systems, our ability to successfully scale our manufacturing capabilities, our reliance on third-party manufacturers and suppliers that could adversely affect out ability to manufacture products on a timely basis, the scope and validity of intellectual property rights applicable to our products, competition from other companies, and our ability to obtain additional financing to support our operations, and other risks factors detailed in the risk factors section of our periodic SEC filings, including our quarterly report on Form 10-Q filed with the SEC on August 5, 2008. We undertake no obligation to revise or update information herein to reflect events or circumstances in the future, even if new information becomes available.

With that, it’s now my pleasure to turn the call over to Hansen Medical’s Chief Executive Officer, Dr. Fred Moll. Fred?

Fred Moll

Thank you, Kathy. Good afternoon everyone and thank you for joining us. On today’s call I’ll update you on the progress we’ve made during the third quarter of 2008, which marks the completion of six quarters of commercialization for our Sensei Robotic Catheter System. Following my comments Gary Restani our President and Chief Operating Officer will then expand on the commercialization efforts in the United States and Europe. Steve Van Dick our Chief Financial Officer will then conclude of additional details about our financial results and recent financing activities.

After our prepared remarks, we’ll open it up to questions. I’m pleased to report a record breaking third quarter and which we recognize revenue on 14 Sensei systems. This represents a 75% increase in revenue units overall previous quarterly high. As of the end of the third quarter, the total number of our Sensei systems and which we have recognized revenue, which we refer to as our installed base, has now grown to 45. This includes 30 systems in the United States and 15 in Europe.

I’m also pleased to report our record breaking third quarter and which we recognized revenue on 423 Artisan Catheters. The 423 Catheters shipped during the third quarter brings our year-to-date total to 1103. This is a 190% increase and shipments compared to our seven months of commercial shipments in 2007.

On our last call I indicated that we would be implementing a process to better understand our actual utilization of Catheters and clinical cases as compared to the number of catheters shipped. In the third quarter we began this process by quantifying our customers existing inventory. We plan to continue to gather this information in order to better understand and determine actual quarterly unitization.

We believe we’ll take as an additional two or three quarters to establish meaningful utilization, but thus far we are pleased with how our catheter utilization is trending. The third quarter was also notable for Hansen and that we’re able to celebrate the completion of well over 1000 cases since beginning commercialization. This is a significant milestone. As it represents a growing body of clinical data and experienced that we believe reflects the benefits our technology can provide to customers and patients.

In addition to our development efforts in the treatment of complex atrial arrhythmias, we’re also investigating other EP applications such as Ventricular tachycardia and left atrial appendage occlusion. For example, we have made very good progress and refining our Sensei system for the delivery of capitals to be used in the diagnosis and treatment of VT, a life threatening arrhythmia.

Since ventricular tachycardia is typically treated by the same physician who treats atrial fibrillation and it is a logical extension of our systems clinical capability. Next, I would like to discuss our success and expanding the Sensei platform for use in applications outside of electrophysiology. During our last call, I reported excellent progress that the researchers at St. Mary’s hospital in London had made in using the Sensei system for a new application in vascular surgery.

This specific application involves improving the accuracy of fenestrated stent graft placement for the repair of abdominal aortic aneurysms. Earlier this quarter, we announce the completion of our first human case involving the use of robotics in an endovascular graft procedure. This case highlighted the opportunity for better accuracy, decrease time an improved predictability in the placement of a stent graft with Hansen technology.

As we continue our work in this area we believe the Sensei system can take a central role in the enhancement of existing endovascular technique. With regard to our effort in percutaneous valve technology we have made what we consider to be significant progress in the last 10 months to better understand how robotics can be used to improve percutaneous valve delivery.

We recently completed the series of animal trials with our valve, which demonstrated in vivo function. Having gained this experience we have now decided to focus our internal resources on the further development of percutaneous robotic delivery solutions rather than undertaking at this time additional clinical studies and their associated financial burden. While continuing to discuss a number of partnering opportunities for our valve, we believe that showing broad capability of advanced delivery techniques in percutaneous valve procedures positions us optimally for partnering in this market.

We continue to be excited by the rapid development of the PAD market and our opportunity to participate in its future growth as well as other potential applications in the structural heart space. With regard to market conditions and their affect on our future revenues I can report that thus far we have not yet observed any material negative effects of the economic downturn and credit prices on our business prospects.

While none of us can now how credit markets and economic conditions will affect the healthcare sector in general we believe that the capital constrains maybe largely mitigated for Hansen relative to our competition and due to our favorable value proposition. We believe that we are better positioned than our primary competitor whose system requires a significantly larger upfront investment as well as a multimillion dollar facility renovation.

In addition, we believe that our co-marking agreement with St. Jude gives our customers an option to leverage their purchase of the Sensei system with other St. Jude products. This option offers an alternative means of acquiring a Sensei system, which is less dependent on a hospitals capital equipment budget and/or the current credit market conditions.

In summary I am very pleased with our progress on accomplishments during the third quarter, our most successful quarter of commercialization today. We have now gained experience from well over a 1000 clinical cases in a variety of different hospital setting. I continue to be impressed with the enthusiasm with which the majority of our customers embraced the Sensei technology and I am confident that with each new customer installation we are building a value proposition and a value position in the electrophysiology market. We are also creating an exciting opportunity in vascular surgery as evidenced by our success in endovascular aneurysm repair.

We believe this new application has the potential to significantly improve, endovascular grafting procedures for patients and physicians. We are also believed this procedure is an example of the power of the Hansen technology to extend the Sensei platform well beyond the EP market.

This concludes my prepared remarks. With that I will turn it over to Gary Restani for a closer look at some of our key operating activities.

Gary Restani

Thank you, Fred. As Fred mentioned in his early remarks the third quarter was a record breaking quarter for Hansen. We had our best quarter ever in terms of system sales, catheter unit sales, and total revenues. Of the 14 systems that contributed in the third quarter revenue, nine were delivered to sites in the United States and five delivered to Europe.

Notably we recorded our first Sensei sale exceeding $1 million. This sale was to a customer that embraced the flexibility of the Sensei system by ordering a second robotic arm for placement in a second EP lab suite. Also of note this quarter, our decision to add a Nation account function is demonstrating its value. We expect that our ability to sell effectively in hospital buying groups and integrated delivery networks is becoming an important element for future growth.

Case in point we sold three systems to the VA this quarter and we also signed a master sales agreement with a prominent IDN. During our last call I discuss the conversion of some our initial Sensei systems from warranty coverage to full service agreements. I am pleased to report that during the third quarter we have now converted the total of ten customers to full service agreements.

With regard to our St. Jude collaborations, sales and marketing efforts of our CoHesion product to our US customers began during this past quarter and we are pleased to announce that nine Sensei systems sold in the third quarter were configured with CoHesion margin, four of which were sold in the US

In the third quarter we also recorded our first sale to St. Jude medical under our co-marketing agreement. As a remainder our co-marketing agreement allow St. Jude to sell our CoHesion enabled Sensei system to hospitals when it is leveraged with other St. Jude products. We feel that our co-marketing agreement with St. Jude will provide our customers with alternative to traditional means of acquiring capital equipment.

Throughout 2007 and 2008 as we entered into our initial commercialization phases we made aggressive investments in all areas of our business from our manufacturing and engineering organizations to our sales, service, marketing and clinical teams. This also included the move into a new larger facility which was completed this quarter. These investments were necessary in order to get our business of the ground and running.

As expected these investments have affected margins and operating expenses. Our new facility is designed to accommodate our capacity requirements for the next three to four years and therefore positions the company to effectively handle a significant increase in production volume. This capacity for growth will continue to be a factor in our gross margins for the remainder of ’08 and during 2009. Beyond 2009 as our company transitions into a more mature business and with many of our initial investments behind us, our operating expenses should be better aligned with the level of our revenue. To that end over the past two quarter, we implemented an organization wide focused expense management initiative.

So, in closing our business performance remained very solid. I am pleased with the results from both our sales and service organizations. I am also very pleased with our internal development programs in both the areas of ventricular tachycardia, vascular and structural heart applications.

With that I will now turn the call over to Steve Van Dick, our Chief Financial Officer for the closer look at third quarter financial details and our outlook related to Sensei system shipments for the remainder of 2008.

Steven Van Dick

Thanks, Gary. Moving first to our third quarter 2008 income statement, we recorded a record quarterly revenue of $10.9 million primarily on the sale of 14 Sensei systems and shipments of 423 Artisan Control Catheters. This represents a 214% increase over the $3.5 million of revenue in the same period in 2007 in which we sold five Sensei systems and 140 Artisan catheter.

The average selling price for the 14 system sold during the quarter was approximately $715,000. This is the highest ASP, we’ve experienced to date and an ASP that is significantly higher than the $638,000 ASP in the third quarter of 2007. This is due primarily to the CoHesion System sold along with one system sold with the second robotic arm.

The Artisan Control Catheters sold in the quarter had and average selling price of approximately $1800 compared to $1950 in the third quarter of 2007. Cost of goods sold for the quarter for $6.6 million and included non-cash stock compensation expense of $200,000. Gross profit for the quarter $4.2 million, yielding a gross margin of 39%. This compares to a gross profit of $189,000 and a gross margin of 5.5% for the same period of 2007.

During this quarter, a company experienced an increase in the overhead applied to its inventory due primarily to the company’s move into a new facility. This increase was fully realized once the preexisting inventories have been sold. How the company experienced those higher costs for the entire quarter cost of goods sold and gross profit would have been negatively impacted by approximately $900,000.

For the remainder of 2008 and 2009, we expect the cost of goods sold both as a percentage of revenue and on a dollar basis will continue to vary from quarter-to-quarter due to a variety of factors including revenue levels, the fluctuations in average sales prices and manufacturing levels in yield fluctuations. In reviewing the key expense line items on the income statement, research and development expenses for the third quarter were $7.2 million including non-cash stock compensation expense of $27 million.

In the same period of last year R&D expense was $4.5 million, which included non-cash stock compensation expense of $0.6 million. The increase in the R&D expenses was primarily due to increased employee related expenses due to the higher R&D headcount, along with increased outside services, materials and overhead expenses. The company anticipates research and development expenses to continue to increase moderately for the remainder of this year as we continue to development efforts for the electrophysiology market and continue to explore other applications.

Selling, general and administrative expenses during the third quarter were $8.9 million, in included non-cash stock compensation expense at $1.9 million. This compares to SG&A expenses of $6.5 million for the same period in 2007, which included non-cash stock compensation expense of $1.8 million. The increase in selling, general and administrative expenses was primarily due to employee related expenses, related again to higher headcount necessary to support our continued growth, legal costs for the development to our intellectual property portfolio along with other IP and litigation related legal costs and supplies, equipment and overhead. The company expects general and administrative expenses to increase moderately during the remainder of this year as we continue to expand our sales and clinical support groups and as we prepare for our March trail in our litigation against Luna Innovations.

Other loss net for the third quarter of 2008 was $28,000 compared to net income – other income net of $801,000 for the same period in 2007. The change was primarily due to higher interest expense due to our borrowing under the new equipment line of credit in addition to a lower interest income related to lower average cash, cash equivalents in short-term investments. We expect our interest expense to increase as we continue to utilize our equipment line of credit and our interest income will continue to decrease as we utilize our cash to cover our operating in other expense.

Net loss for the third quarter of 2008, including total non-cash stock compensation expense of $2.7 million, it was $12 million or $0.48 per basic and diluted share. Based on an average basic and diluted shares outstanding of $25.1 million. Net loss for the third quarter of 2007, including non-cash stock compensation expense of $2.5 million, about $10 million or $0.46 per basic and diluted share. Based on an average basic and diluted shares outstanding of $21.6 million for the same period in 2007.

Turning to the balance sheet; cash, cash equivalents and short-term investments as of September 30, 2008 were $45.6 million compared to $48.6 million as of December 31, 2007. The lower cash balance was due to the company’s normal operating expense and $17.2 million in capital expenditures during the first nine months of 2008, primarily related to the build out of our new facility. This partially offset by capital rates from financing activities during the year.

In addition to the company’s $39.5 million second quarter equity raise, during the third quarter we completed a $25 million debt agreement with Silicon Valley Bank. With a $25 million line is comprised of a $15 million equipment line of credit and a $10 million revolving line of credit. So, $15 million equipment line has been use to finance construction of our new facility and other capital equipment acquired since December 1^st, 2007 and as well as refinances the company’s previous term loan. The company can continue to draw down on this facility until March 31^st, 2009.

As of September 30, 2008, $12.5 million have been drawn on this facility. With a $10 million revolving line of credit, allows the company to borrow against the qualified receivables and inventories. We believe that additional financing improves Hansen’s capital structure in the overall financial flexibility in a way that reduces dilution to our existing shareholders.

Moving on to our business outlook, in our previous calls, we provided full-year guidance for annual system sales in 2008, of between 44 to 50 systems. So far, we have performed as we expected with our sales being backend loaded towards the second-half of the year, we fully expect this trend to continue next year.

Given the current outlook for our business, we are now able to tighten our guidance range to between 45 and 48 system sales for the full-year of 2008. Given the 30 systems, on which we’ve recognized revenue on through first three quarters of 2008, this new guidance implies recognizing revenue on between 15 to 18 systems in the fourth quarter.

We will provide 2009 guidance, when we report fourth quarter results. Thank you for your attention and at this time, I’d like to turn the call back to Fred for some concluding remarks.

Fred Moll

Thanks, Steve. As evidenced by our system in catheter sales for this last quarter, we’re experiencing strong demand for our technology in the electrophysiology market. We are also encouraged by the progress we’re making in market outside EP and believe that this success provides evidence of the opportunity to leverage Sensei platform into a variety of other interventional applications. In conclusion, we are very pleased with our progress to-date and look forward to the year ahead.

At this time, we’d like to open it up to some questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Mike Weinstein with JP Morgan.

Mike Weinstein – JP Morgan

Let me start with a couple areas and forgive me it’s been a long day and a long month. So I know you’ve covered some of this, but I just want to make sure I understood. First, with some of the non-EP initiatives that you have underway and some of the opportunities there, I heard your comments and I want to make sure I understand what your strategy is with regard to AorTx, with regard to some of these other vascular and non-vascular opportunities, to what degree you’re going to look the partner up these opportunities and should we expect to hear anything on that front in the next three months, six months whatever?

Fred Moll

Yes, so many go through and we spent a lot time on the endovascular portion and excited that is nearer term opportunity where as I said, we did our first human, we’re going to do more humans. We are building a story in vascular surgery, that we’re really excited about and as I say, that can be our contributor to revenues next year in a fairly significant way. The valve opportunity is obviously a longer term thing, we’ve made some good progress with understanding and characterizing our valve and what’s exciting about that the percutaneous valve market is: (A) it’s going quickly and (B) to great degree I would characterize it and not everybody would agree with this, but I think there is great evidence that it’s really not about the valve per sake, it’s about delivering our procedure so that is able to reduce to as low as possible the risk associated we delivering in setup of eight valve.

All these valves, which we know are pretty similar in their function and so we believe that now concentrating rather than spending millions of dollars on developing our own valve by ourselves, we think there is a great opportunity to partner and develop the valve or whatever valve that is in conjunction with our delivery system, because we believe the delivery system is the key to widespread adoption of these procedures and really driving the Hansen opportunity.

Mike Weinstein – JP Morgan

Just to be clear here so are you at point in dialogue with strategic partners on, whether it to be trans-catheter valve placement or some of these other opportunities?

Fred Moll

Yes.

Mike Weinstein – JP Morgan

Okay and so just stay tuned?

Fred Moll

Yes.

Mike Weinstein – JP Morgan

Okay, and can you give us a sense, you obviously had a very good quarter in terms of the number of shipments you’re track for delivering on the guidance you laid out at start of the year, which I think is great. Can you give us a sense of the utilization of the system out there? What percent is do you think and I know there’s nobody to know this exactly, what percent do you think is EP at this point and when can we expect to see some additional data from trial s using the system. And I also want you if you would mind just if there’s an update on the ACF trial in Europe. Thanks.

Fred Moll

So, make sure I understand you question. So, you’re asking what percentage of the cases being done our EP. And the answer to that is almost 100% at this level. And the second part of our question with regard to the clinical trial in Europe we are reporting in one of the trials a 100 patient trial, we’re approaching the halfway mark there. So, we’re not quite at the halfway mark, but we are getting close. So, its progressing nicely.

Mike Weinstein – JPMorgan

And then, the last question and then – let others jump in here. It just to clear, your view at this point on at least your business within the US and O-US hospitals is that you’re really not picking up any signs of delayed orders, any request to push out timelines on your systems?

Fred Moll

So, as I said, we have not observed any material negative effect of the economic downturn in our business prospects. And, no on knows how the credit markets in the economic conditions will affect healthcare but, as I said we believe that we are very well position relative to our competitors. And because of what we think is very strong value proposition and the ability to sell systems in a leveraged way with St. Jude all those things, I think are working in our favor.

Operator

Your next question comes from Philip Legendy with Thomas Weisel Partners. Please go ahead.

Philip Legendy – Thomas Weisel Partners

I wonder if we could – you said that can you that will take a few quarters to get a good idea of what a steady state catheter utilization rate is. But, I wonder if you have any observation as you can share from maybe some of the earliest accounts that in terms of what their utilization is to give us an idea of where this could go in the accounts where it take offs.

Fred Moll

So, I don't want to get into talking about individual accounts per say, but certainly can give you with examples of early system users that have utilization rates in the three, four, five procedures a week range. Now, that certainly not typical, but there are certainly people that, because of their experience have gotten to the point where they use it is sort of as a routine way to do EP procedures and if you use it is a routine way and you’re a fairly high volume user. You are going to do, between three and five procedures a week if you are, as I say if you are a busy guy.

Philip Legendy – Thomas Weisel Partners

Okay, then on another one on AORTECH’s, does – just to be clear on the how the spending is going to work, does this mean it sounds like your at least postponing your clinical program, should we expect to see the spending in the R&D line come down sequentially?

Fred Moll

Well, I think we did pretty consistent on this. We are trying to be smart about how we enter the percutaneous valve market. We think it’s an extremely exciting new development in structural heart disease, but we also are very aware of and trying to be prudent about spending, relative in R&D and as, the to take a valve and take it through the whole human trial is an extremely expensive proposition and as I say we’ve been clear about this since we started work that, our preferred method of entering this market is with a partner and so we, in order to get the partnership we are looking for. We needed to do and continue to do work on really illustrating how powerful a robotic delivery means can be in conjunction with the valve and, so we are making great progress on that.

And we have chosen as I said not to go ourselves immediately into a clinical trial with our particular valves because of, the very significant cost, and because of our optimism with the opportunity to partner in that process with another company and share in the expenses of developing that market with them.

Philip Legendy – Thomas Weisel Partners

And that make a lot of sense I think. Different subject, SG&A looks like it actually came down a bit since last quarter, it was up year-on-year, but down sequentially. Just wondered if you could give us some insight into where that reduction came from and, should we expect that reduction to, is that a one time thing or should we expect that to recur?

Steve Van Dick

I think, this is Steve, I will try that. The biggest component of the reduction from second quarter to third quarter is related to the, if you remember our second quarter call we have talked about pop in our SG&A expenses primarily due to litigation expenses revolving around the Luna innovation. There was binding arbitration process that took place in the second quarter that resulted in a jump up in the expenses in that area. Because if you back to the first quarter our SG&A expenses was just a little over $8 million.

So you kind of see is, the third quarter is hitting, just under $9 million. We are kind of back to what you consider kind of more of a normal area and again like we talked about in the script, we are trial date has been for Luna innovation in early ’09 I believe in March and you know as you begin to prepare for a trial you will begin to see, kind of later this year as well as in the first quarter ’09, our legal bills going up once again, as we head to that trial.

As well as, we are growing our sales; you know what Gary would call our customer facing people. We are still making investments in our sales organization, our clinical support field, clinical support organization as well and you know you will see headcount increases, as we head towards the end of the year to set up the appropriate organization through the first half of ’09.

Gary Restani

But if I can just add, it’s safe to say that we are, our ongoing business reviews cause us to look at our cost distribution and balancing that and of course we are going to pay specific attention to non, what I call know non-customer facing cost bills and we are going to be very diligent in that area and managing that, so what you will see Phil is that our real keen focus on expense management control where the activity cost is not evident to growing in front of the customer, so we are going to be diligent in that area.

Philip Legendy – Thomas Weisel Partners

Okay, I will throw out one more and then leave sometime for others, but I just wanted to check and I apologize if I missed it, but there were two systems last quarter that had slipped forward. I wonder can you tell us where geographically did those show up?

Steve Van Dick

In Germany?

Fred Moll

Yes, one was in Germany and one was in Southern California.

Operator

Your next question comes from David Lewis from Morgan Stanley; please go ahead.

Ryan Chu – Morgan Stanley

Ryan Chu in for David Lewis. I just had a couple questions. The first one has do with cryoablation and the last few months you had some major cardio companies acquiring some cryoablation companies. Could you just talk about the opportunity you see in cryoablation whether AF otherwise?

Fred Moll

I think cryoablation is a legitimate alternative to RF energy for creating ablative lesions in some patients, some of the time and so, I think it does have a place and we’ll continue to have a place in EP and I think it is probably most likely to have the biggest impact in paroxysmal procedures where the clinician is comfortable with doing pulmonary vein isolation and not a lot of other ablation activities inside the atrium.

So, I think it’s interesting, it has been show to be fairly effective and certainly not perfect in this recent trails and I think it has good safety profile and I think importantly for Hansen Medical. We have the opportunity, if in fact that significant number of procedures go to the cryoablation method. We have the ability to really make some great improvements and moving around and it appears to be a cryoablation balloon isolation will be the technique, that will be probably popularized in the next few years in this country that we have ability to move that balloon around and get the places they need it to go with stability and control.

I think that’s going to be an opportunity because we have an open platform that’s going to be an opportunity for Hansen that our competitors were not be able to take advantage of. So, we’re optimistic about the impact of cryoablation and how it possibly impact Hansen. I don’t believe it’s going to be substituted in lots of cases for RF just because I think it’s going to be more patients specific.

Ryan Chu – Morgan Stanley

Okay, great. Thanks for that and my next question that was on Thermocool. Its likely Biosense will get the label indication for AF going into HRS probably next year? Could you talk about, how you feel with the impact of that would be on your business and to the outlook?

Fred Moll

Yes. Again because we have an open architecture and we are compatible with Thermocool. I don’t see a big impact and how that sort of changes the game. I think it may help Biosense incrementally, but I don’t think it’s a big game change. Gary?

Gary Restani

Ryan, I’d say I think in fact that we are a delivery system 85% of our current cases use of Thermocool and they get approved, I think this whole off label issue may become more palatable, quite frankly. So, we are going to still be involved in delivering the Thermocool. So, in Europe it’s used very often and here in US 85% of our cases used Thermocool. So, I don’t see how that’s going to hurt us, in fact I think it will help our…

Fred Moll

It may help in market grow and I think that’s the most important issue is that, if it gets in a labeling indication, I think you will see people incrementally coming to this market and do these procedures, but haven’t been doing them because there is no approved product.

Ryan Chu – Morgan Stanley

Right. Have you broken out that remaining 15% of cases among, which catheter is using with vendors?

Gary Restani

It’s a breakout of things, there is a little bit of Navistar, there is a Boston, Chilli and other, but it’s really there is a big gap between the Thermocool and then the others right now and I would say the Boston product is probably second utilization.

Ryan Chu – Morgan Stanley

Okay, great. Yes, one last question was on cash use and CapEx. So, you took out the equipment line of credit and are using that toward the move to the new facility and some refinancing. Are there other kind of capital needs that you see over the next 12 months that you need cash?

Steve Van Dick

This is Steve. Our funding and financing alternatives that we evaluate, we simply don’t comment or provide guidance on that. I mean all really look to is, that we’ve got $45 million of cash and cash equivalents in the short-term investments on our balance sheet and feel with that covers our cash needs in next year plus and so that’s probably at all I can say on that.

Ryan Chu – Morgan Stanley

Okay and the revolver is currently undrawn?

Steve Van Dick

The revolver is currently undrawn, yes.

Ryan Chu – Morgan Stanley

Okay, that’s all I have. Thank you for taking the questions.

Operator

Your next question comes from Ed Shenkan with Needham & Company; please go ahead.

Ed Shenkan – Needham & Company

Thanks. I just wanted to follow-up a little bit on the financing for hospitals. If you could just give us a little bit more comfort in that area what percent of your placements or finance maybe you could talk to that and if there is been a trend over the last 12-months or so, and if there is a preferred vendor that you use for the financing and if you could talk to that as well?

Gary Restani

Well actually, I think can only, in the past it has been a big factor. It maybe I think Steve, one or two?

Steve Van Dick

Yes, in terms of, we’re only aware of our customers who finance if they actually use a lease company at the time that they acquire the equipments and we get a purchase order from the lease company and of our installed base of 45 that we’ve done from inception to-day, we’ve only received one or two purchase orders from a leasing directly from a customer who is doing a financing via leasing, but what a customer does act towards, which is as I choose to finance on our existing line, or do a sale leaseback, we just don’t have visibility of that.

Gary Restani

If that requirement were to accelerate in the future, we are positioned with a number of prime vendors in those areas to be able handle those requests and as we stated, we feel well positioned with our St. Jude agreement from that of the option of leveraging. So I think with those, I think we’re prepared and ready for whatever alternative comes to us in that area.

Ed Shenkan – Needham & Company

We’re in sort of special times here with the crisis and if you could give us anymore details, I’m sure if you can share placements that you’ve had say, since the beginning of October that might have been financed or even late in September, since this whole credit crisis hit, if you can provide that that’s if you can’t we understand it, is that something you could tell us?

Steve Van Dick

Yes, I mean currently, right now we’ don’t have anymore details that we can really provide other than the fact that we haven’t seen any material impact on our September or in our business that we see closing in Q4.

Ed Shenkan – Needham & Company

And as far as utilization on the catheters, you said it’s around three to five per week. I think that was consistent with what we’ve had in the past, if not correct me and then, if you could just tell us what percent or proportion of the procedures is that for those docks?

Fred Moll

So Ed, I must be using the example of the high-end and I think the question was for people that have had the system for a long period time and then are extremely comfortable with using the system, what sort of utilization rates do you have. So that was explained in the high-end of utilization and what’s possible, and so having said that the whole reason, we’re going through this process that we described is to understand utilization relative to sale of catheters and so, I’m not giving you utilization rate, because we’ve know it yet. I’m giving you example at the high-end of utilization and certainly not all of our customers are at that rate.

Ed Shenkan – Needham & Company

Yes, fair enough. Fred, so the high-end, the guys who loved your system, who were doing these three and five, is that like a 100% conversion for those guys? Or, is it 50%, or some guys really converting to a 100%, like what you see in there, but just give us an idea of that rate…

Fred Moll

I see what you’re asking. So no, it’s not 100% conversion of their cases, because even if you love the Hansen system, you usually have a criteria where really straightforward arrhythmia procedures, there is less of the reason to use the system and so that we talk a lot about complex arrhythmias, but there are lots of arrhythmias, that aren’t so complex that they treat and some of these clinicians use the system even in the very simple treatments for arrhythmia and some clinicians have a pretty strict criteria for the type cases that they use a Hansen system and the type the case is well good in manual technique.

Gary Restani

And that’s part of our current learning curve. As you know, we’re really out there six quarters and as we’re building this capability and that’s why utilization is something we’ve really have to dig into and understand and how we get utilization in these accounts to be more consistent. So, we’re working on that and as we hope to get more adoption and as the system is in there longer, I think we’re going to get a better handle on it.

Ed Shenkan – Needham & Company

And nice quarter on the placements here for the systems going forward, can you give us an update for manufacturing, both maybe where you’re at now? Where you expect to be at the end of ’08 and the end of ’09?

Gary Restani

Yes, well. I think, we’re in a good place in manufacturing, Ed. We can handle these type of quarters that we just experienced in more as we go forward, our capital capacity is as we’ve seen here, we built a facility that wasn’t just going to give us through the next six months, that’s going to get us through the next three to five years. So, we believe we have a capacity potential to meet our next three to four years and we are not in the place we were 8, 9 months ago where we were capacity constrained to a degree. So, we’re in a good place in both catheter and systems.

Ed Shenkan – Needham and Company

And can you give us an update on number of sales reps currently end of fourth quarter expectations and maybe even ’09. And I will get into queue from more questions.

Gary Restani

Yes, in the US we will have what I call 25 customer facing people we’re going to have 12 sales people there is a senior VP, sales VP, 12 other regional and sales directors. And we have 12 clinical sales specialists. So, that adds up to a total of 25 at the end of this year in the US In Europe we have a total of 7 direct people in our direct countries as you know it’s U.K., Germany, Switzerland and Austria, and the other are distributors representatives, feet on the ground which handle our business in Italy, Spain and France, which are other distribution capabilities so in total direct sales reps is 17 and we have 15 clinical sales specialists, which are customer facing then we have nine service people in the US and 3 in Europe.

Ed Shenkan – Needham and Company

And expectations going forward, fourth quarter and next year.

Gary Restani

Yes, we are looking, ’09 we are going to continue to grow, and we’ll probably be looking to grow that number by probably a 20% rate. And again may be a clinical specialist will grow at a little higher rate and sales specialists, only because again in other markets we will have distributor organizations, so our clinical sales specialists will probably grow at a little higher rate in our sales.

Ed Shenkan – Needham and Company

We think you’re set here through the end of the year. When would you add you ’09 reps the beginning of the year, middle, or end, or throughout?

Gary Restani

Well, we will probably add early, we have added some, as you know the current basis added in this last quarter, some people add in this last quarter and we are going to add more in the first and second quarter.

Operator

Your next question comes from the line of Suraj Kalia with SMH Capital. Please go ahead.

Suraj Kalia – SMH Capital

What is the length of the sales cycle currently, and have you all seen any change recently.

Gary Restani

Yes, that’s a great question because with all this concern about the markets you have to understand that we’ve always been in the pretty lengthy sales cycle. And our sales cycles, from getting the lead to fruition, can be anywhere from 6 to 18 months and the key has a pipeline that you have got in those cycles right and you are constantly moving that forward. So, to Fred’s earlier your comments, we have not seen a material change.

The effort we are going to really be putting on in ensuring we keep the right amount of opportunities in the upcoming quarter in play. And so, we always keep more opportunities than you would have that you would want to build in play in that’s I guess focus of our confidence. Is that our pipeline look solid we haven’t seen our pipeline deteriorate, again materially there is always going to be a one or two moment we seen that before prior to these situations.

They have moved from a quarter to another quarter. Again we haven’t got a crystal ball but we feel in this area our value proposition and how we manage the sales process and by that I mean we just don’t sale to the EP we go right up to the CEO suite in each account. So, we have very good visibility as to where our system procurement is and at what stage its at, so we try to manage that very, very clearly.

Suraj Kalia – SMH Capital

And in terms of the cases that are being done. Can you characterize with a broad brush to the reps have to physically present per case once you get a system up and going and is there a funneling effect that the procedure cannot be done because the rep is not present or vice versa, how would you say…

Fred Moll

No, we been we have talked about this in the past, very proud of the fact that in our business model and our training programs we plan to train and support the customer up to a point where they can gain true independence from any involvement or patient from our reps. And so, when that occur is a little fluid because it depends on that the somewhat on logistics and somewhat on the amount of training that the clinical support staff believes the clinical condition can – is appropriate so but we have a pattern of training clinically, supporting that the clinician for a number of cases and then planning the exit such that they will be fully independent from Hansen clinical support.

Suraj Kalia – SMH Capital

And Fred on a rolling basis whether you talk about two quarters or three quarter or four quarters. How many Sensei in the field would you characterize as sleeping Sensei that means, they really not up and going and I come back to original point, if I look upon four procedures per week, average for your really high volume users that’s about 50 catheter a quarter. If you’re selling 423 in a quarter it goes without saying some of the Sensei are sleeping and or really not up to speed. In how much time do you thing the Sensei are up to speed where you would say, even though you don’t have a good idea about the utilization, you will say, they are really not setting idle they’re producing something.

Fred Moll

No, I wouldn’t cal it setting idle I mean, certainly there is probably a couple examples where Sensei that actually have had the time to percolate through the process aren’t being used a lot but, there are number of systems in that we are growing, placements rapidly per quarter so there is a lot of systems that are sort of in the early stages of utilization. And just by definition, if you’re early in the utilization cycle, you’re not going to do the volume that the systems that have been around for a while and have people, multiple people trained on a system and certain institutions, you’re just not going to do the same sort of a volume.

And so, it does take time for the system once, we obtain a purchase order, install the system, train the clinicians, schedule the cases that the Hansen clinician will be present at and come get that clinician up to speed, it’s a process that, takes a while in its different for every system we sell and so there is aren’t a lot of system that are sleeping there are systems that are not anyone here up to full utilization, because they haven’t sort of gone to the process of getting up to full independence and utilization by the institution, the people call by the institution is it not just the one clinician that stuck up his hand to say we got to get this and I want to get start it.

So, its process and we are the reason I mentioned our utilization study is we want to be all over that we want to understand, the process of where we’re getting full utilization quickly and how that happened and where we’re getting slower adoption and what are the barriers to faster adoption. Is it more training? Is it some sort of support for the customer that we’re not doing and so I’d say this is working progress and with through the days of intuitive, when we couldn’t get more than a couple of cases a month.

Now, we understood why and it just grow utilization always grows slower than you’d like it, but we are seeing favorable trends and excited sort of this is a compounding thing where you get, once you get the formula of how to move a new customer rapidly into a high volume situation. Once we get that formula, I think it’s going to make a big difference.

Suraj Kalia – SMH Capital

One last question I’ll hop back in the queue. I give you guys credit for being upfront in saying you don’t have crystal ball and there is some things definitely beyond your control, but I’ll still ask it. Fred, there are going to federal deficits. I mean the environment is going to be tougher, I think so we all see it. Can you help characterize as best as you can at this stage and I’ll understand if you can’t, would you be willing to engage in price cuts or do you think you all can tailor your new facility, so that you get into economies of scale and you can reduce the cost to us a point that will make you weather the storm sort of speak or to come a lot more competitive?

Fred Moll

Well, I guess to say this, I sure don’t. I mean we have no evidence, but we would be in a situation where we would the only way we’re going to move system is to cut price. We have not seen any evidence of that today and as I said we haven’t – we just don’t see the effects of the credit crisis and again as we’ve said before we think we’re positioned well to weather the storm if there, if in fact the storm comes our way. So, I don’t have a crystal ball, but we do feel good about where we are and we will manage our business according to sort of changing economic conditions. So, other than that I can’t be more specific.

Steve Van Dick

This is Steve. I think the other thing I would say is that, I don’t think we have to be in position to cut prices to be competitive because in place the systems, our main competition is significantly more expensive then we are in terms of what they have to put out. I mean you’re look at maybe in our average ASP was $715,000 during the third quarter, whereas to buy a competitors remote navigation system that doesn’t even cover the initial outlay of the piece of equipment, without even considering in the multimillions of dollars, it takes to renovate the facility to be able to install their piece of equipment. So, I think we’ve got quite a bit of lead way in our pricing when it comes to being competitive.

Gary Restani

Right and I would add beyond that are immediate competitor. I think your point is, there is going to be competition for capital equipment in general and that also puts us in a good position. We’re competing that lots of capital being demanded for the customer and we have seen this because of our positioning, we are in a favorable price position because they can get a new important technology at a very reasonable price compared to the bigger systems out there, whether it’s radiology systems, whether it’s other robotic systems and other specialties, it all comes out of that same institution.

So, we feel our value proposition is effective and we seen that because this is always being capital equipment. I think you all know that, has always been dog-eat-dog business and we handle it very well, it has been a very competitive. So, now it’s a bit more competitive granted, but we’re well positioned to handle that challenge because of our – not only our price and that’s why price cutting is not an issue. I think we’re position with our price position, our price value proposition right now.

Suraj Kalia – SMH Capital

Gentlemen, thank you for taking my questions.

Operator

Your next question comes from Spencer Nam with Summer Street Research.

Spencer Nam – Summer Street Research

I just have a quick follow-up questions on a few things. I guess first question I have is the US versus the international placement. It looks like in Q3 you guys did a exceptional job with the international side about third replacements coming from there. I was wondering if whether we would expect similar trends going forward even as early as in Q4, I mean is that two-thirds, one-third sort of the kind of the right mix that we can think about?

Gary Restani

When we modeled this, we didn’t have it as high as that quite frankly, we’re probably a little lower, but it continues to demonstrate that the current environment in Europe for our system is strong and we have markets for example like Germany, we got I believe close to four systems placed in Germany alone and so that the acceptance of our product is strong. So that the ratio we are not saying we’ve got a goal of 30%, but its staying at that rate right now, we hope, I don’t mind having a 20% ratio in Europe if my sales in the US are significantly higher, so, but we are going to see a continued strong demand I think demand from Europe.

Spencer Nam – Summer Street Research

I appreciate that. Moving onto this cash on your balance sheet, $45 million what does it include? Does it include the revolving capability, the credit facilities? Or just a, is that pure cash right now?

Steve Van Dick

I mean that would be pure cash. I mean we have not drawn down any money on our $10 million revolver. But we have drawn down on our equipment line, so the money we drew down to pay for the good chunk of the facility build out as well as the furniture and fixtures with the facility, that debt has been drawn down in the last couple of quarters.

Spencer Nam – Summer Street Research

I see, and did you mention that in your call what that amount was? Is it $12 million or something like that?

Steve Van Dick

$12.5 million has been drawn down on our $15 million facility.

Spencer Nam – Summer Street Research

Then in terms of burn rate, could you guys tell us what the quarterly burn rate was?

Steve Van Dick

The way I kind of like to look at the burn rate which, kind of focuses us on kind of taking out the unusual capital equipment as well as fund raising activities. We think that’s averaging around, $12 million you know if you look at the $9 million at the last three quarters that’s averaging about, $12 million to $13 million a quarter.

Spencer Nam – Summer Street Research

Okay, great. And then finally this, when we exclude the CoHesion system it looks like on average the sales for Sensei, the price for Sensei has declined from previous quarter, is that a fair characterization or am I doing my math wrong?

Gary Restani

No, I think you are probably doing your math wrong. I think if you take out the CoHesion portion of the sale, our ASPs for the third quarter would still be higher than what you saw in the second quarter of ’08?

Spencer Nam – Summer Street Research

Okay, great I think that’s it for me. Thank you.

Fred Moll

Thank you.

Gary Restani

Thank you.

Operator

Your next question comes from Richard Sack [ph] with First Allied Securities [ph], please go ahead.

Richard Sack – First Allied Securities

Good quarter gentlemen, happy to hear the news.

Steve Van Dick

Thank you.

Richard Sack – First Allied Securities

My question has to do with the last conference call or analyst call wherein it was stated that 93% of patients treated for AFIB are returned to normal sinus rhythm shortly after the procedure. It seems to me that the real potent efficacy of the treatment would be if they maintain normal sinus rhythm after lengthier periods of time, can you give us statistics relative to that question?

Fred Moll

I can’t quote you new statistics. I can agree with you that is important to watch patients overtime and really it’s a, it’s not a quarterly thing. You got to see them at six months and you got see them at a year, so the immediate post-procedure conversion rate is important, but it’s not the whole story and so you need to follow these patients overtime. I can’t give you any updates on that particularly population.

Steve Van Dick

Yes, if I remember correctly we were quoting this statistics from an abstract of the presentation that St. David did and they have not yet published, an update to that clinical data.

Richard Sack – First Allied Securities

When do you think you will be able to provide us with statistics?

Fred Moll

So that’s the St. David’s as Steve St. David’s study and they will determine when they are ready to produce the data, and I am sorry I can’t give you a date.

Richard Sack – First Allied Securities

Okay, thank you.

Steve Van Dick

Alright, operator maybe just one more question if there is one.

Operator

Your final question comes from Philip Legendy with Thomas Weisel Partners, please go ahead.

Philip Legendy – Thomas Weisel Partners

Hi, guys two quick technical ones. Did you give the interest rates on those new credit facilities?

Steve Van Dick

No we haven’t provided that information.

Philip Legendy – Thomas Weisel Partners

Okay, will those, we just have to wait for those in the Q?

Steve Van Dick

I mean I think the equipment line of credit right now, it’s a floating rate and I believe that initial takedowns were down at about a 6%, maybe between 6% and 6.5%.

Philip Legendy – Thomas Weisel Partners

Okay, and then you mentioned a your first sale to St. Jude in the quarter. I just wanted to check how many systems were in that sale?

Steve Van Dick

I mean let me be a little bit more specific. This was our first sales to St. Jude under our co-marketing agreement. We have previous sales to St. Jude that was not under our co-marketing agreement earlier on, but there was a single sale to a single to a German customer.

Philip Legendy – Thomas Weisel Partners

Got it. Thank you.

Operator

Thank you, and management I will turn it back to you for closing comments.

Fred Moll

Thank you. I appreciate everybody’s participation on this call. As I hope we have communicated. We are really excited about our position in the marketplace and our building story in electrophysiology as well as our progress in other areas. So, thank you for your attention and look forward to speaking with you in the next earnings call.

Operator

Thank you. Ladies and gentlemen, that will conclude today’s teleconference. If you'd like to listen to a replay of today's conference, please dial into 303-590-3000 or 1-800-405-2236 and enter the access code of 11121112 followed by the pound sign. And thank you again for your participation and at this time you may disconnect. Have a nice evening.

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